The chief executive of Yahoo, Jerry Yang, said he felt let down by Google's decision to pull out of an advertising agreement between the two internet rivals.

The $800m (£500m) deal, which would have enabled Google to sell advertising on some parts of Yahoo's search engine listings, had been subject to a formal investigation by the US department of justice over potential monopoly concerns. Google decided on Wednesday that it would pull the plug on the agreement.

"It was disappointing to us that they didn't want to defend this deal," said Yang, speaking at the Web 2.0 summit in San Francisco. "We were going through a process with the department of justice to get them to understand how this was a good deal."

Yang insisted that the deal - if it had gone through - would have allowed both companies to benefit from exploiting each other's weaknesses, rather than increase Google's dominance in the search engine market. "It's incredibly important to participate and compete for the search marketplace ... in fact, we are doing better in search today than when this whole thing started," he said. "I really thought that the government, in this case, does not understand our industry and has a market definition that is too narrow."

Google had announced its surprise decision by saying that it did not want to take part in a drawn-out fight.

"Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners," said Google's chief legal officer, David Drummond, in a statement.

The pact had been seen as a tactic to ward off Microsoft's $44bn attempt to buy Yahoo, which ended in acrimony after the two companies failed to come to an agreement. But Yang rejected that interpretation, saying there was no "poison pill approach" taken by Yahoo executives.